Prime Minister David Cameron has told the European Commission that most of its budget was 'not well spent'

But sources in Brussels said Berlin had asked the European Commission to examine whether the 26 other member states could make a seven-year budget deal without Britain at this week’s meeting.

German Chancellor Mrs Merkel was said to want an EU budget agreed this week so that Europe can concentrate on other measures, such as creating a ‘banking union’, as she tries to save the single currency from disintegration.

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Mrs Merkel is arguing that she is ‘dealing with a fire in Europe’ and has no intention of ‘letting the UK park its car in front of the fire station’.

However, it is far from clear whether she could succeed in pushing through any deal with the agreement of only 26 out of the 27 EU member states.

Rather than announcing a traditional long-term budget, it is possible an alternative deal could be rubber-stamped on an annual basis – which would require majority support rather than unanimity. But Government sources said that it would be ‘inconceivable’ for the European Commission to seek to make Britain pay more on that basis.

London mayor Boris Johnson wants the Prime Minister to follow Margaret's Thatcher's line on the EU and veto anything but a spending freeze

This week’s summit is turning into a potential nightmare for Mr Cameron, who acknowledges there is no chance of the rest of the EU voting for a cut in its budget over the seven years from 2014.

Since the Prime Minister has vowed not to back any increase, the only possible outcome he can support is a freeze – though dozens of his backbenchers are demanding a reduction.

In a sign of the increasing euroscepticism at the top of the Government, two Cabinet ministers – Environment Secretary Owen Paterson and Northern Ireland Secretary Theresa Villiers – were last night due to attend a dinner to mark the 20th anniversary of the Tory rebellion over the Maastricht Treaty that created the EU.

Mr Cameron spent the weekend talking to his counterparts abroad trying to build support for a budget freeze. Some nations, particularly Sweden, appear ready to back Britain.

At the CBI annual conference yesterday, he said: ‘I think I have got the people of Europe on my side in arguing that we should stop picking their pockets and spending more and more money through the EU budget, particularly when so many parts of the European budget are not well spent.

‘One of the interesting things . . . is how little attention there has been on the central costs of the EU, the commission budget, what people get paid.’

But Labour leader Ed Miliband warned that pressure from eurosceptic Tories had forced Mr Cameron into ‘negotiations that will not deliver’.

Instead he should focus on ‘building alliances’ to ensure Britain does not lose out when eurozone countries deepen their ties in a new two-tier Europe, Mr Miliband added.